Sajid Javid is a businessman and private investor. He was previously a senior Managing Director at Deutsche Bank AG. In this Platform he argues that the current wave of state intervention must not be permanent, and that Anglo-Saxon capitalism is essential for our prosperity and liberty.
Every Christmas I attend a reunion of old school friends from Bristol. The talk often turns to politics, as my friends know my interests all too well. This year, after a bout of banker bashing, one friend stated: “capitalism is dead!”. Admittedly, by this time my friends had consumed a few drinks, but it still startled me to see others nodding their heads.
Upon reflection, who can blame them? It’s what they see. We have nationalised much of our banking industry. Government spending has rocketed. Taxes are up. Regulation is back. Class war is encouraged.
Capitalism is in a good deal of trouble. State intervention, control and ownership – in the UK and beyond – is back in fashion. But over the past 150 years, capitalism has more than proved its worth. The parts of the world where it has been let loose have flourished; the parts where it has been held back have languished.
The importance of capitalism is not just driven by economics. A critical reason why capitalism has been such a success is that its sits well with human nature – our desire for liberty and prosperity. Communism eventually collapsed because it relied on a total restriction of individual freedom to survive. It murdered millions just to avoid criticism.
As long as people want to improve their living conditions, earn more than their parents did, own their own home and car, go on holiday, travel the world and buy cool, but perhaps even useless, things, they will need a mechanism that allocates scarce resources far more efficiently than a repressive state. Capitalism is not perfect, but if you want prosperity and genuine freedom, it is essential.
Given the enormity of the current economic crisis, in the short term, the defence of capitalism itself requires state intervention. After the failure of Lehman Brothers, I can tell you from my own experience, that the global financial system was most certainly close to collapse. If G7 governments didn’t step in with help, then the outcome would have been truly catastrophic.
This does not in any way denigrate capitalism or undo its achievements. Capitalism has always engendered crisis, and always will. It’s part of the “package”. You cannot have the fruits without the weeds. What is critical is that we learn from each crisis, and that governments carry out actions that are driven by pragmatism and not ideology.
A weak populist argument, as made by my friends that day, is that the capitalist model has failed. Critics of “Anglo-Saxon capitalism”, like President Sarkozy, claim that the Thatcher and Reagan reforms of deregulation and privatisation laid the seeds for the current crisis. If this idea continues to gain ground, it will become harder for us to sell the public sector reforms we need, in order to create choice in, for example, education and health.
The reality is, of course, that it is these very reforms that led to 30 years of wealth and freedom on a huge scale. Even after accounting for the current recession, British and American people have left the last decade a lot wealthier than when they entered it.
More reasonably, critics can argue that modern finance contributed to the crisis. Some banks took extreme risks, and the balance of risk and reward was skewed throughout the financial chain. Yet, these failures can’t be blamed on deregulation alone. We all now know that the US, UK and European central banks deliberately kept interest rates too low for too long, leading to a boom in virtually all asset prices. The wall of money looking for a home from Gulf and Far East foreign exchange reserves pushed up asset prices too.
But heavier regulation is not the answer. Countries, such as Japan, with more highly regulated financial systems did not manage to avoid the crisis. Instead of more, we need smarter regulation. George Osborne’s plan to end tripartite banking regulation, for instance, is on the right track. The proposed EU financial reforms are on the wrong track.
For politicians that are pro the free market, it may seem utterly mad to promote their views at this point in time. However, if we are to get out of this mess and avoid the slide towards more state intervention and less liberty, promote it, they must.
The danger is one of over-correction. In an attempt to protect ourselves from the weeds that capitalism produces, we risk stifling the ambitions and entrepreneurial activity we need for growth. It’s not surprising that when I speak with business people, they believe that 2010 will be a critical year in determining our economic direction for years to come.
We need to cut wasteful government spending and get the budget deficit under control, to re-discover that cutting taxes can lead to a rise in tax revenues, and to reduce regulations faced by businesses. Crucially, we need to take powers back from the EU – because if we don’t, we may find that no matter how hard a Conservative government works to promote open markets and choice, we’ll find state intervention coming in through the back door.
A functioning free market also needs government to promote aspiration – not one that condemns those that “make it” as the “privileged few”. As Janet Daley wrote recently:
“Most of the people whom Mr Brown calls the 'privileged' are just those who were once aspirational and who, through hard work, talent, and sometimes self-sacrifice, made their wishes come true.”
In Labour’s class war, someone like me – the working class son of an immigrant bus driver who managed to succeed through a combination of pushy parenting, risk taking and sheer hard work – is the “privileged” enemy. In such an environment, why aspire?
As each day brings us closer to removing this government, whilst taking on board the lessons learned through the financial crisis, we would do well to recall the mission of the Conservative government elected just over 30-years ago: “to roll back the frontiers of the state”. It’s the only way to guarantee the British people prosperity and liberty.